Acquisition

The Company entered into and consummated the Purchase Agreement on April 17, 2015, among the Company and certain of its subsidiaries, Accountable Health Solutions, Inc. (the "Seller" or "AHS") and Accountable Health, Inc. (the "Shareholder"). Pursuant to the Purchase Agreement, the Company acquired the assets and certain liabilities representing the health and wellness business of the Seller for approximately $7.0 million - $4.0 million in cash and up to 433,333 shares of the Company’s common stock, $0.04 par value, with a value of $3.0 million, which was subject to a working capital adjustment as described in the Purchase Agreement. At the closing of the Purchase Agreement, the Company issued and delivered 371,739 shares of Common Stock to the Shareholder at closing and issued and held back 21,739 shares of Common Stock for the working capital adjustment, which were subsequently released on October 9, 2015, and 39,855 shares of Common Stock for indemnification purposes. No additional shares will be issued under the terms of the Purchase Agreement. The shares were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, which provides an exemption for private offerings of securities.

In order to fund the Acquisition, the Company entered into and consummated the Credit Agreement with SWK on April 17, 2015. Refer to Note 9 of the condensed consolidated financial statements for discussion of the Credit Agreement and related warrants.

The Acquisition was treated as a purchase in accordance with Accounting Standards Codification (ASC) 805, Business Combinations, which requires allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed in the transaction. The allocation of purchase price is based on management’s judgment after evaluating several factors, including a valuation assessment.

The allocation of the purchase price was finalized in the first quarter of 2016 and is as follows:



(in thousands)
Accounts receivable, net of allowance of $2	$	918
Inventory and other current assets	117
Fixed assets	123
Customer portal (existing technologies)	4,151
Customer relationships	2,097
Goodwill	633
Accounts payable and accrued expenses	(743		)
Deferred revenue	(296		)
Purchase Price	$	7,000

Intangible assets acquired include existing technology in the form of a customer-facing wellness portal and customer relationships. The fair value of the customer relationships acquired was determined using the excess earnings method under the income approach for customer relationships; and the fair value of the wellness portal software was determined using the replacement cost method. The estimated useful life for the wellness portal and customer relationships is 4 years and 8 years, respectively. Amortization is recorded on a straight-line basis over the estimated useful life of the asset. The Company recorded amortization expense as a component of cost of operations of $0.2 million and $0.8 million, respectively, and amortization expense as a component of selling, general, and administrative expenses of $0.1 million and $0.2 million, respectively, during the three and nine month periods ended September 30, 2016. The Company recorded amortization expense as a component of cost of operations of $0.2 million and $0.5 million, respectively, and amortization expense as a component of selling, general and administrative expenses of $0.1 million and $0.1 million, respectively, during the three and nine month periods ended September 30, 2015. The goodwill of $0.6 million was recorded in one reporting unit, the health and wellness operations, and is deductible for tax purposes.

The consolidated statement of operations for the three and nine month periods ended September 30, 2016, includes revenue of $3.4 million and $8.6 million, respectively, attributable to AHS. Disclosure of the earnings contribution from the AHS business is not practicable, as the Company has already integrated operations.

The following table provides unaudited pro forma results of operations for the three and nine month periods ended September 30, 2015, as if AHS was part of operations on the first day of the 2014 fiscal year.



(in thousands)	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	2015			2015
Pro forma revenues	$	9,272		$	25,023

Pro forma net loss from continuing operations	$	(2,060	)	$	(7,912	)

These pro forma results are based on estimates and assumptions, which the Company believes are reasonable. They are not the results that would have been realized had the Company been a combined company during the periods presented, nor are they indicative of the consolidated results of operations in future periods. The pro forma results for the nine month period ended September 30, 2015, include pre-tax adjustments for amortization of intangible assets of $0.3 million. Pro forma results for the three and nine month periods ended September 30, 2015, include pre-tax adjustments for the elimination of acquisition costs of $0.1 million and $0.7 million, respectively.